Hey Rongphale; I come from the Nexus and I've been contacting you through YT eager to participate with ideas on this mod. Knowing that you're really busy and have your hands full at the moment, I signed up here just to watch your thread. I hope I can be of more help (if at all) in this forum.
Well; first of all and once again, your mod amazes us. Really; it is really exciting to see such dedication and participation from so many modders like you. It's inspiring....
I'll try to be helpful in the only way I can; with ideas.
The reason why I was hesitant to implement spells because... they make player very, VERY overpowered. If I could come up with some balance, then I would love to include 'arcane mounted' in the modI tried to come up with a practical friendly solution that wouldn't consume so much time and effort in its design. (relatively, none at all)
Mages cast spells by concentrating their innate abilities to bend the very core of matter and energy right? Usually, mages do need to concentrate to cast even the weakest of spells. Wouldn't be hard to concentrate in order to cast a spell while galloping at full or medium speed? Of course it would, right? Perhaps you could implement the use of arcane skills by making it only possible when the horse is jogging and not running.
You mentioned also that the use of magic while mounted would leave space for the "hit and run" type of play. Well; once again, since concentration while mounted is more difficult and needs so much more effort, how about decreasing the rate at which magicka regenerates? Perhaps cutting a big chunk of the percentage would balance this. How about 35%, 50%,65%???

And of course; you could always add a perk or two to make this handicap a little less painful.
The weapon reach. As in vanilla, most one-handed weapon has reach of 1.0, and it makes quite hard to hit the enemies from horse back. If the target is standing just below the horse's ground level, player can't hit it at all. If I have spear with reach of 1.5, well, it's different story. I hope there is a way to actually extends the weapon's reach dynamically without changing every weapon in the game. I personally have no experience whatsoever in modding; I've tried and failed several times until I gave up

. So the only solutions I can give away are practical ones. With that being said (again).....
Thinking over about this problem I came up with an idea. What if you were to make mounted combat weapons restricted?? I'll try to explain so it doesn't (hopefully) sound so silly

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If you or a member of the MERP team were to create different weapon models; war axe, one handed sword, mace, bow, dagger, etc. specifically for mounted combat??? You could manipulate the weapons' reach to whatever number necessary. This of course would leave out the majority of the weapons in the game and the vast amount that will become available in the future. But let's be honest, not every weapon was made thinking about fighting on horseback.... these ones on the other hand (the models with modified/extended range) are.
Perhaps you can even "clone" vanilla weapon models and modify them to your/the mod's needs.
The existing 3rd person combat: This one is a pain too. In 3rd person mode, your target will be picked automatically without the need of the crosshair. As long as the target is right in front, you can hit it. Even if its a chicken standing before your feet and you are aiming way above its head. This potentially messes up the whole combat system, as you won't know what target the game picks for you when you strike.Once again, I know nothing about scripting or modding at all.

Isn't there a way you could "target" the enemy that your next attack would hit? Perhaps with a hovering arrow, light transparent red body glow or some other time of target indicator.
Probably the game will pick the one closest to you, in this case, your horse. And if you were to add some type of limitation range script or behavior for the attacks? For example; "if the distance between you and the enemy is greater than"?? Or some time of behavior file that forces you to hit the second closest actor in the combat??? This is tricky

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Trying to solve these issues alone is really frustrating
I really want to release it soon for everyone, but not in this unrefined state.Take your time bro; no matter how much we are in need or how excited we are. It would not be worth it if YOU are not happy with its state. If it isn't complete or ready for a beta release, don't release it. We can wait. Just keep at it and you'll eventually find a solution

. Breathe deep and follow your pace, not the players'.
Great work bro; really.